Ofcom Aid Full Fibre Broadband by Stopping Targeted BT FTTC Price Cuts

The UK telecoms regulator, Ofcom, has opened a new consultation on a change to help foster the roll-out of “full fibre” (FTTP/H) broadband networks by preventing BT from reducing its wholesale charges for slower hybrid fibre (FTTC) connections in areas where rivals are building new networks.

The somewhat 11th hour move forms part of the regulator’s on-going 2017 Wholesale Local Access Market Review (WLAMR) and follows concerns raised by a number of alternative network operators, most of which are currently trying to roll-out some very expensive new FTTP/H services.

In recent months a number of independent fibre optic providers, such as Hyperoptic, Gigaclear, Cityfibre and Vodafone, among others, have announced significant deployments of Gigabit capable Fibre-to-the-Premises (FTTP) style networks (examples here and here). Not to mention that Openreach and Virgin Media also have their own FTTP expansion plans and aspirations.

Apparently some of those operators were concerned that their ambitious deployment plans could be threatened by BT. Vodafone and Cityfibre in particular warned Ofcom of a risk that “BT would respond to competitive FTTP investment, or the threat of investment, by defensive overbuild and/or introducing geographic price discounts targeted at areas of early rollout by rivals.”

Vodafone also expressed concerns that BT’s ability as a vertically integrated telecoms provider could enable the provider (and other ISPs using the Openreach UK network) to compete more fiercely at the retail level. Cityfibre similarly expressed concern that Openreach is likely to use the pricing flexibility proposed by Ofcom for “superfast broadband access services in excess of 100 Mbits” to undermine rival deployments of FTTP.

At this point we should remind readers that Ofcom rather uniquely defines “ultrafast broadband” as starting at 300Mbps+, while almost everybody else talks about the definition being 100Mbps+. In other words, Ofcom’s new measure for FTTC affects both VDSL2 and the latest G.fast based hybrid fibre services (FTTC VDSL2 covers around 90% of the UK and FTTC G.fast should reach 10 million premises by 2020).

The Solution

Ofcom agreed that “targeted price reductions by BT could deter rivals from investing in competing networks,” which they said might happen either where BT cuts prices ahead of a build occurring (e.g. in response to an announcement of rollout) or because rivals anticipate a strong targeted response after they have rolled out their new network.

The regulator suggested that by deterring investments in competing networks, BT could also benefit from avoiding the pressure of network competition. At this point the regulator highlights some parallels with the pricing of wholesale services during the early roll-out of unbundled (LLU) copper networks by rival ISPs after 2005 (e.g. TalkTalk, Vodafone and Sky Broadband), although BT did subsequently commit voluntarily not to introduce geographically targeted price reductions.

In response Ofcom has today proposed to introduce a new clause into their Significant Market Power (SMP) conditions to specify that similar conduct with the pricing of Fibre-to-the-Cabinet (VDSL2 / G.fast) based “superfast broadband” services would amount to undue discrimination.

Ofcom’s Statement

This will make clear that BT is prohibited from targeting areas of competitive entry by varying its wholesale rental prices by geography for this review period. In effect, this would require BT to maintain its uniform national pricing approach for Openreach’s GEA-FTTC rental services and G.fast.

While we are trying to promote competition in superfast and ultrafast broadband services, we recognise that the benefits of this provision could be undermined if BT were able to target price cuts to services currently used alongside GEA-FTTC to deliver SFBB and UFBB (i.e. MPF and WLR). We are therefore also proposing that the restriction would apply to the copper bearer necessary for any GEA-FTTC service.

We do not propose that this measure should extend to BT’s GEA-FTTP services. We consider that extending the policy to GEA-FTTP services would do little to help nascent network investment by rivals. This is because BT could not quickly change prices for FTTP services because it would itself need to deploy an FTTP network, and in any case given BT’s current limited plans for FTTP it is likely that any overlap with competitor FTTP would be small. In contrast, it could rapidly change prices for existing services and for new services such as G.fast, which are quicker to deploy than FTTP.

The move is interesting, particularly since Ofcom themselves are currently still proposing to slash the wholesale price of Openreach’s 40Mbps download / 10Mbps upload FTTC (VDSL2) broadband tier from £88.80 +vat per year today to around £52-54 +vat by 2020/21 (here). The final level of reduction is somewhat dependent upon other factors, such as what the Government and BT do with respect to the proposed 10Mbps USO.

However Ofcom’s plan to cut the FTTC pricing did not go down well with several ISPs, including Openreach itself (they are also proposing a “large-scale” FTTP rollout and need to build a good business case for it just like everybody else), which warned that ultra-cheap FTTC might run the risk of discouraging investment in new / alternative / faster networks that would struggle to compete.

On this point Ofcom said that their proposed charge controls on the 40/10 FTTC tier and MPF “set a cap, but not a floor“, for charges, and “investors might be unclear how the fair and reasonable condition would apply to excessively low prices and targeted discounting.” In reality Openreach has campaigned against the proposed FTTC price cut, which may explain why their response today has been fairly placid.

On top of that the proposals only apply to wholesale pricing. Ofcom said “we do not think it would be proportionate to introduce additional measures at this stage to restrict BT’s retail pricing.”

An Openreach Spokesperson said:

“We note the consultation and we will respond accordingly, but our main focus is on building a business case for a truly large-scale FTTP network. Under the right conditions, we believe we can make full fibre available to 10 million premises by the mid-2020s, and the real key to delivering that will be removing the barriers that exist and promoting the enablers to such a major investment.

This is only one small aspect of the WLA review and we’re awaiting Ofcom’s broader conclusions on the right regulatory framework to encourage investment by us and others.”

Nevertheless Ofcom feels the need to act and so they are consulting on the proposed changes until 12th January 2018, although we’ll have to wait for the outcome from the whole review before knowing exactly what the final picture is going to look like.

Ofcom also suggested that their approach would be flexible, so as to allow for situations where BT might wish to “cut wholesale charges locally simply because that is BT’s best commercial option given that entry has occurred” (they often also cut prices when testing new technologies). “So long as this competition does not itself dissuade entry from occurring in the first place, it is likely to have benefits for consumers and therefore we would not normally want to prevent it,” concluded the regulator.